Impact of Debt on Financial Distress

XYZ Corp is considering a change in its capital structure due to signs of financial distress. The management team is reviewing the effects of increased debt on their operations and the potential impact on bankruptcy risk. They are particularly worried about how this might influence their overall cost of capital.

Given the current market conditions and their operational status, the management needs to understand the implications of leveraging up in a financially distressed environment. Which of the following statements about financial distress and capital structure is correct?